How to change the equation for savings and invest in SIPs | Motilal Oswal

Change the equation for savings and invest in SIPs

Let’s discuss a common scenario. Say your salary is credited today, and you receive Rs. 80,000 in your bank account. If you’re like most people, you’ll probably pay your rent and your credit card bills, and then keep the rest of the money for your monthly expenses. You may take your family out for dinner and a movie, or you may take a road trip during the first weekend of the month.

And as the days pass by, and the end of the month approaches, your bank balance will correspondingly reduce. By the last week of the month, if there is any amount left in the account, you may redirect it to your savings or your investments. 

In other words, you spend first and save later. That may not be the ideal savings equation.

  • What is the savings equation, anyway?

In the scenario discussed above, which is a common occurrence in most households, here is what the savings equation looks like.

                                                         Income — Expenses = Savings

In other words, people generally tend to only save up the funds that may be remaining in their account at the end of the month, if any. The problem with this is that you may not be saving and investing optimally today. This leaves your future goals vulnerable, because without saving for them, you will find it tough to achieve those targets. 

For instance, if you want to buy a house some five years later, merely saving up scraps is not going to be enough. You need to actively save and invest with that financial goal in mind. Here is where it becomes necessary to switch up the savings equation a little. Let us take a look at the new — and more ideal — equation you need to follow.

                                                             Income — Savings = Expenses 

See how this switch up means that you need to save first and then spend? What this essentially means is that when you get your monthly salary, ensure that you first redirect a specific amount to your savings and investments, and then use the rest for your expenses. 

So, how much should you save each month?

When you switch up the savings equation, it leads to a very important question — How much should you save each month? That depends on the following factors:

  • The goal that you are saving up for
  • The expected returns on your investment
  • The amount you can afford to save each month

For example, say you want to build a corpus of Rs. 10 lakhs as a down payment for your dream home, which you wish to purchase 5 years from now. You decide to start an online SIP investment to invest in equity mutual funds, which have an expected return rate of 12%. 

So, to save up Rs. 10 lakhs in 5 years at the rate of 12% per annum, you need to start an SIP online and invest around Rs. 6,500 each month. 

Going back to the scenario where you earn a monthly income of Rs. 80,000, you will have Rs. 73,500 for your expenses after you redirect Rs. 6,500 to your savings. This remaining money can be used to pay for your essential expenses like rent, fuel, provisions, etc. and also take care of your discretionary spends easily.

On the other hand, if you are only earning Rs. 15,000 per month, you may not be able to redirect Rs. 6,500 each month to your savings account. This is because you will only have Rs. 8,500 left in hand, which may not be enough to meet your essential needs. In that case, you can reduce your monthly investments to an affordable level and adjust your investment horizon accordingly.

How an SIP helps you switch up the savings equation

Reading about savings first and spending later is easy, but actually doing this can be quite a challenge. Here is where a systematic investment plan (SIP) can help you. Check out how you can prioritise savings over spending by starting an SIP online.

  • You can start off with small amounts

SIPs can be started with as low as Rs. 500. So, you need not shell out a huge portion of your income to start saving for your future. Small amounts will also do. All you need to do is decide on the amount to redirect to your mutual funds SIP investments and begin investing.

  • You get to develop the habit of saving in a disciplined manner

SIPs also help you cultivate the habit of saving up diligently. You need to invest the predetermined amount every month (or every quarter, depending on your SIP). This will help you make savings a priority, because you have a definite amount to save up.

  • You can link your online SIP with your financial goals

Today, there are different mutual funds that invest in various asset classes. There are also funds with varying investment tenures and benefits. You can link your mutual funds SIP investments to specific goals and ensure that you achieve these targets faster. 

Conclusion

Now, if you have decided to take the first step to setting your savings equation right, you can get started with your mutual funds SIP investments right away. But before that, you need to open a demat account if you don’t already have one, so you can invest in the markets in a disciplined manner. Motilal Oswal’s online platform can help you with this.

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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